US investors skeptical about China's move to widen markets

[NEW YORK] US asset managers and hedge funds are wary about pouring more money into China until the government addresses its stock market crash last year and wild swings in the yuan, they said on Tuesday, as China unveiled measures to attract US buyers of its assets.

China will give the United States a 250 billion yuan (S$51.3 billion) investment quota for the first time to buy Chinese stocks, bonds and other assets, officials said, deepening financial ties and interdependence between the world's two largest economies.

China's regulators have been pushing to expand foreign investors' access to domestic financial markets to make its markets broader and attract more capital inflows.

But foreign interest has waned after a near meltdown in Chinese stock markets last year and heavy-handed official intervention to shore them up. "I would imagine that investors would look for certain financial reforms in order to dive in," said Gregory Peters, a senior investment officer at Prudential Fixed Income with more than US$621 billion of assets.

"A consistent application of the rule of law is paramount. ... Not sure China is quite there yet." Carson Block, the head of Muddy Waters Capital LLC who gained prominence for short-selling shares of Chinese companies, was more skeptical. "China increased the quota in an effort support the country's equity, credit and fixed asset bubbles," he said in an email.

US investors are cautious about investing in China, saying they worry about regulatory issues including when the government would reintroduce a circuit breaker mechanism to stabilise the country's stock markets.

The benchmark Shanghai Composite Index has tumbled more than 40 per cent over the past year on fears that slowing economic growth would hurt profits.

William Kirby, a Harvard Business School professor with ties to several funds that invest in China, said "the fundamental governance and political issues that destabilised the Shanghai exchange last summer remain unaddressed. Caveat emptor."

Michel Del Buono, managing director at Makena Capital Management, which oversees US$20 billion of assets, noted that China was dealing with an investment outflow.

"There are questions about regulatory snafus and there are questions about valuations. It is a stock picker's market there," he said. "What they really want is to make their markets more credible. They want more foreign investors to come in and they see it as patient money, you see it as patient money."

The investment quota is part of a recent Chinese programme called Renminbi Qualified Foreign Institutional Investor, or RQFII. The programme allows approved fund managers overseas to use funds raised outside the mainland, in Chinese yuan, to invest in China's financial markets.

An older programme, called Qualified Foreign Institutional Investor, or QFII, set quotas in dollars, which could be converted into yuan for investments. "For an institutional investor this announcement doesn't change much, though to the extent it makes their markets deeper and more liquid, it represents an improvement," Mr Del Buono said.

Another big catalyst for foreign investment flow is on the horizon. Index compiler next week MSCI is expected to announce whether it would include Chinese shares in its benchmark index.

Vanguard, the largest US mutual fund manager, said in a statement that it was premature to discuss its plans in the wake of China's announcement.

"China is one of the world's key emerging economies and the second-largest stock market in the world by market cap," Vanguard spokeswoman Linda Wolohan said. "With the world's second-largest GDP, China accounts for 11 percent of global trade and 8 percent of global consumption. As a result, China can offer significant long-term benefits for investors."

Vanguard's Australian affiliate was granted a RQFII quota earlier this year.

REUTERS